Monday, March 12, 2012

The Benefits and Costs of Alternative Growth Paths for Sydney: Economic,Social and Environmental Impacts,Centre for International Economics

Tony Recsei 12 March 2012

A report that was commissioned by the previous Labor Government in New South Wales and delivered back in December 2010 has only now been released by the current Government. This report, by the Centre for International Economics, is titled The Benefits and Costs of Alternative Growth Paths for Sydney: Economic, Social and Environmental Impacts (CIE Report). It examines alternative ways in which additional people could be housed in Sydney.

The New South Wales Department of Planning has projected that the population of the Sydney region will increase from 4.3 million in 2006 to 6.0 million by 2036, an annual increase of 57,000 people (NSWDOP, 2008),. For a number of reasons, including overcrowding and environmental concerns, most of the public oppose such an increase in the population (PC, 2011a; EMC).

THE METROPOLITAN STRATEGY

New South Wales Government sees planning doctrines based on higher population densities to house this projected increase. Its planning policy, known as The Metropolitan Strategy, works on locating some 70% of new dwellings within existing urban communities (in-fill) and 30% in greenfield sites (NSWDOP, 2005). The policy is implemented by ministerial directives and State Environmental Planning Policies issued by the Minister of Planning. These are promulgations issued by ministerial fiat and are not even tabled in parliament, let alone debated there.

To accomplish this 70/30 strategy the Department of Planning in effect has placed a restrictive growth boundary around Sydney to force higher-densities into existing residential areas. Greenfield land release has been reduced from an historic 10,000 lots per year to less than 2,000 (NSWDOP, 2010; Note 1). In tandem with this reduction in housing land availability the Department of Planning insists that local authorities plan for a specified increase in the number of dwellings in their areas. This insistence is backed by the threat of taking away their planning powers if they resist. This authoritarian impost is reflected in the finding that the majority of communities report that they feel their governments are not concerned with community preferences on planning issues (PC, 2011b). Existing policies are thus undemocratic and widely resented. But can they be justified in terms of public good?

THE CIE REPORT

It is possible to find some answers to this question in the CIE Report. This examines three different scenarios for Sydney for the period covered by the Metropolitan Strategy. These portray alternatives of 90%, 70% and 50% of new housing to be built in existing urban areas (and correspondingly 10%, 30% and 50% in greenfield sites).

The report assembles evidence which appears to favour densification against fringe development. However this evidence is very flimsy. It may well be that the reason for the delay in releasing the report was to avoid scrutiny of this flimsy evidence base.

FINDINGS OF THE CIE REPORT

The report finds that when compared to the current Metropolitan Strategy 70/30 ratio being implemented, that a 90/10 proportion would save $795 million (or $1,761 per dwelling) whereas a 50/50 proportion would cost an additional $4,992 million (or $11,064 per dwelling). It also finds that for 100% of new dwellings in Greenfield sites the additional 25 year cost per dwelling would be $26,000. The report does not attempt to proportion these costs and benefits between the public and private sectors.

The CIE Report is of a much higher standard than previous reports on the subject. But despite this, it contains some serious flaws.

CURRENT CONDITIONS ASSUMED AS A BASIS

For its findings the CIE Report calculates costs for the two additional scenarios to the Metropolitan Strategy’s 70/30 policy that it examines. These costs are shown as differences from the current 70/30 strategy, which is taken as a zero base. But the Metropolitan Strategy produces market distortions in that it has caused a severe shortage of land on the fringe which has grossly inflated the cost of housing. The report states “Sydney is considered to be the most expensive city for housing in Australia and one of the most expensive cities in the world. In this context housing affordability has been a key issue of concern to the community” (p. 178). But in its calculations the CIE Report does not take into account the effect of the land shortages resulting from the 70/30 strategy on the cost structure of the other two scenarios examined.

It is noticeable that as part of the trend resulting from the Metropolitan Strategy, over a five-year period (2000 to 2004) annual greenfield housing land production on the Sydney fringe decreased by 6000 lots. During this period the median price of lots in Sydney escalated from $150,000 to $350,000 (UDIA, 2009). As a result of this trend the median price of a house in Sydney is now about $650,000 (Note 2), far more than it need be (Note 3).

The 90/10 strategy, with a mechanism of further intensification of the current growth ring boundary restriction, would reduce the supply of land still further from that of the 70/30 strategy. As a result of supply and demand this shortage would lead to still higher prices. In contrast, a 50/50 strategy, with its relaxation of the growth ring boundary restriction would increase the land supply and result in lower prices.

Not taking into account price variations caused by land shortages has two implications for the report. Firstly, if they had been taken into account, this would have had the potential to significantly change the relative cost differences found between the scenarios examined. Secondly, such differences as have been found are comparatively trivial. They are completely swamped by the magnitude of the actual cost of houses.

It should be noted that coinciding with an increase in housing cost has been a deterioration of the economy of New South Wales relative to other Australian states. It has become noticeable that there has been some movement of people and employment to other centres (Berkovic N., 2007; Salt B., 2008; Colebatch T., 2011), Sydney employers not only have to pay excessive rentals caused by land scarcity, they also have to pay increased salaries to enable employees to meet their high housing costs. This also is not taken into account in the CIE Report.

TRANSFORMATION BENEFITS

The CIE Report quantifies “transformation benefits” that will accrue from individual developments. It defines a “transformation benefit” as one that “relates to the value people place on living in different areas above and beyond the cost of providing dwellings in these places. This incorporates all private costs incurred and benefits received by households and developers in producing dwellings and making decisions about where to live” (p.12).

Under this heading the report sets out figures on a range of costs and benefits. The calculations are based on the distorted market conditions and result from three factors. These are:• developer profits that are estimated from reported actual developer profits;• theoretical gains to households from being able to buy a property that they prefer to other properties and• gains to existing landholders if they can get higher prices for their land.

These factors of course will be influenced by many elements including the inflated land costs discussed in the previous section, a variable which the CIE Report does not take into account. The land shortage caused by the Metropolitan Strategy is likely to result in higher profits for developers building multistorey apartments than would be the case if buyers had the choice of single-residential housing at lower prices that would result from policies with less restrictions.

Further, it is questionable whether such private sector impacts should be included and whether such items are legitimate matters of public policy concern.

If transformation benefits are to be included, then, for consistency, impacts on other parties such as existing residents should also be quantified. These impacts include:

• The impact on the value of a single-residential property that has high-rise built next to it. This can include theft of amenity - new infill residents look over gardens of existing residents while the latter have to look onto unsightly structures, suffer lack of privacy and overshadowing. The report states, but does not take into consideration, that this can depress the value of property by as much as 30 per cent (p.121);• Congestion - existing residents have to suffer from increasingly congested streets and shortage of street parking (Cox W., 2010; Note 4);• Shortage of recreational facilities – as more vacant land is built upon in an existing community originally designed for low density, it becomes impractical to find new open areas. This means that the community cannot meet the recreational needs of the additional population for sport and other outdoor activities;• The general effect of more and more high-rise in a former predominantly single-residential neighbourhood including a perception that an increase in the incidence of crime is associated with denser areas (which the CIE Report finds is beyond its scope to consider, p.61);• Reduction in housing choice. Most infill development consists of apartments which are not suitable for bringing up young children (Randolph B., 2006; Recsei T., 2011). Indeed the majority of those currently living in apartments do not do so by choice. They can be described as the economically engaged, battlers or those achieving education (Easthope H., 2009). Indeed multi-storey apartments are not even acceptable to most people wishing to downsize if they have other choices (Levi J., 2010); • Reduction in biodiversity - the impact of gardens and open space being replaced with unit blocks has a severe effect on urban plant and animal life (Conacher Travers, 2000);• Heritage items valued by the community are often lost (National Trust, 2011);• Human health - high density considerably increases the incidence of mental illness (rates of schizophrenia almost double), (Lederborgen F.et al) and there are other documented negative health effects (Maas J. et al 2009);• Atmospheric pollution. There is a local effect on residents of atmospheric pollution (Mustafić H,, et al, 2012) in high-density. This is due to less volume of air being available for dilution and dispersion and to higher traffic densities;

These impacts on existing residents, if quantified into the report’s transformation benefit calculations, would probably completely change its overall findings.

QUESTIONS ON COSTS

(a) Electricity and water

The report alleges that electricity consumption is greater in houses than in apartments. This is incorrect. Studies show that consumption per capita is greater in apartments (Myors P. et al 2005). It appears that the data relied upon in the report apparently does not take into account the significant common electricity consumption of the whole apartment block which include energy used by such items as lifts, lighting common areas such as foyers and car spaces and the common components of air conditioning. Studies also show that, contrary to expectation, that per capita water consumption is no different for those living in units than for people living in single-residential housing (Troy P. et al, 2005).

High-density advocates claim that infrastructure costs will be saved by imposing higher densities onto communities originally designed for lower densities. However the opposite has occurred. In the period since high-density policies have had time to have a significant effect, the New South Wales Independent Pricing and Regulatory Tribunal has authorised unprecedented increases in water tariffs of 40%, sewerage of 18% and electricity of 100%. All of these within a four year period. This has resulted in economic hardship to sections of the community (Note 5).

If, in the future, planners want to save on reticulation costs by maximising the use of localised energy (sunlight) and water (rain) then the greater the roof area per occupant the more feasible this will be.

(b) Transport

As far as transport is concerned the report makes three important admissions. The authors say:• “there is no clear guide as to whether total transport costs (congestion and infrastructure) will be higher in a growth path focused on fringe or in existing areas” (p.72)• “travel times are relatively similar across different regions, as people who face lower time costs of travel choose to travel further, and people on the fringe typically travel on less congested roads and walk less” (p.74)• “For future fringe areas, the transport patterns for work journeys will depend on where employment is located. The share of employment that occurs locally could also change through time as businesses take advantage of better availability of labour on the fringe” (p.75).

But despite these uncertainties, the report produces specific figures for its scenario comparisons and finds that the cost of major road infrastructure in the fringe alternative would be $18,000 per dwelling and for public transport $9,000 (p.78).

CONCLUSION

Firstly, the findings of the CIE report are marred by the fact that some of the costs that it uses on which to base conclusions are questionable and the fact that not all significant factors are covered. If costs and benefits were fully accounted for, including the costs and benefits born by existing residents, a case for emphasising densification over fringe development would simply not stand up.

Secondly, the report’s findings, such as they are, make the unpopular Metropolitan Strategy 70/30 policy that has been imposed onto communities difficult to justify. When the number of dwellings and the time period involved are taken into consideration, the cost differential found between the scenarios it examines is too small to justify imposing a particular policy. Overall for the 50/50 scenario, the report finds the additional cost per new dwelling to be $11,064 per house over a full 25 year period. This is an infinitesimal amount compared to the costs that people have to pay for houses described earlier, costs which have been exacerbated by excesses that are generated by the current growth-boundary policy. A high proportion of people currently forced to live in blocks of units would probably prefer to live in lower densities on the fringe. It is bizarre that their preferences should be outlawed in order to save a paltry sum of money.

Fourteen months went by between the date that this report was completed and the date when it was released. Why the delay?

At the time it was completed it may well have been an embarrassment both for the Department of Planning and the then government. Neither would have cared to admit just a few months before the 2011 March election that the major reason they had provided for an unpopular policy, namely cost difference, proved to be insignificant.

If costs and benefits are fully accounted for, including those born by existing residents, the case for a policy of densification over fringe development cannot be supported. If we must have urban growth in Sydney there is no justification to continue to frustrate the popular demand of the community that desires more of it to be on the fringe and less of it as in-fill.

Unwanted high-rise development represents theft from the community. It reduces the amenity of existing residents and reduces the monetary value of their properties. It transfers that value to property developers without recompense. This theft is abetted by autocratic fiats imposed by the developers' collaborators in government, making that government a participant in kleptocracy.

EMC A survey of nearly 2000 people revealed that in the large capital cities only 7% think Australia needs a larger population while 87% think it needs a smaller or the same population (6% don’t know). Australia’s Population, Essential Report No. 100419, 19 April 2010, Source: Available from http://www.essentialmedia.com.au/?s=Do+you+think+Australia+needs+a+larger+population [accessed 12 March 2012]

Levi J., 2010, A stack of evidence to show Govt is off-track, North Shore Times, 8 January 2010, http://digitaledition.northshoretimes.com.au/default.aspx?iid=32372&startpage=page0000002#folio=004 [accessed 8 March 2012]

National Trust, 2011, (The National Trust of Australia (NSW)) Of Form Assembled in the Light -The National Trust’s Submission to the Chairs of the NSW Planning Review, p.30 http://planningreview.nsw.gov.au/LinkClick.aspx?fileticket=lO60_vJvmao%3D&tabid=105&mid=516 [accessed 6 March 2012]

Note 1 It should be noted that expansion of Sydney does not have a significant impact on food production. Only 7% of food consumed in New South Wales emanates from the Sydney basin and of this only 1/3 is vegetables, the largest proportion is eggs and poultry, cattle and pig slaughter (J. Wilkinson, Agriculture in the Sydney region: historical and current perspectives, NSW Parliament, Feb 2011). Furthermore the area required for housing is small in proportion to agricultural land in the region and it should be relatively easy for development to bypass significant agricultural land that otherwise might be impacted such as the estimated 2025 hectares used for vegetables

Note 2 The median price for a house in Sydney is given as: $651,000 in B.Gora, Sydney house prices worse than London or New York, Sunday Telegraph, 30 May 2010; And as:$637,600 (September 2011) in 8th Annual Demographia International Housing Affordability Survey, Dec 2011, p.41, http://www.demographia.com/dhi.pdf [Accessed 6 March 2012]

Note 3. A current (March 2012) “back of the envelope” calculation for the cost of a house on the city periphery, unrestrained by artificial shortages, reveals the land cost at $10,000 (from subdivided farmland on the outskirts costing $60,000 per hectare yielding six 600 sq. m lots), services at $90,000, and other costs $20,000 giving a total unimproved cost of about $120,000. Add the cost of building a 3 bedroom 2 bathroom house at $130,000 gives $250,000 for the cost of a home (personal communication)

Note 5. A survey has found that one in five New South Wales households was unable to pay an electricity, gas or phone bill on time and seven in ten expect to have to make sacrifices to meet future bills. J.Irvine, Struggle puts squeeze on bill payments (referring to a Wesley Mission Report), Sydney Morning Herald 31/10/2010 http://www.smh.com.au/lifestyle/life/struggle-puts-squeeze-on-bill-payments-20101031-178xx.html [accessed 6 March 2012]

NSWDOP, 2005. NSW Department of Planning, 2005, Metropolitan Strategy. City of cities: a plan for Sydney’s future, Source. available from http://www.metrostrategy.nsw.gov.au/ [accessed 6 March 2012]NSWDOP, 2008. New South Wales Department of Planning, [on line]. The annual increase of 57,000 people is projected to consist of an average natural increase of 39,000 and net migration of 18,000 (table 4.1, p.17) Source. available from http://www.planning.nsw.gov.au/population/pdfs/nsw_state_regional_population_projections_2006_2036_2008release.pdf [accessed 6 March 2012]

NSWDOP, 2010 NSW Department of Planning and Infrastructure, 2010. In 2006 as much as 90% of new dwellings were in-fill into existing communities. Metropolitan Plan for Sydney 2036, Strategic Direction D p.107 Source. Available from http://metroplansydney.nsw.gov.au/Home/MetropolitanPlanForSydney2036.aspx [accessed 6 March 2012]

Troy P. et al,2005, Water Use and the Built Environment: Patterns of Water Consumption in Sydney, Research Paper No. 1, City Futures Research Centre, December 2005

PC, 2011a. A Productivity Commission survey of nearly 16,000 people revealed that 64% of the Sydey community would not like an increased population, 9% would like it and 27% did not know or did not care; Performance Benchmarking of Australian Business Regulation:Planning, Zoning and Development Assessments, Productivity Commission Research Report Volume 1, p.28, April 2011; Source. Available from http://www.pc.gov.au/__data/assets/pdf_file/0003/108840/planning-volume1.pdf [accessed 6 March 2012]